Samsung legal defeat unlikely to hit profit much

ChrisOliver

HONG KONG (MarketWatch) — Even as shares of Samsung Electronics Co. plunged Monday in Seoul after its U.S. legal defeat by Apple Inc., analysts said the verdict was unlikely to significantly hit profits.

A federal court jury in California on Friday said Samsung infringed on six Apple patents and awarded $1.05 billion in damages, an amount less than Apple’s request for more than $2.5 billion but much larger than Samsung’s estimates.

Shares of Samsung Electronics
SSNLF, -3.07%
(005930) plunged at the open in Seoul trade Monday, trading down 7.4% by the midafternoon, compared to a 0.1% decline in the benchmark Kospi (SEU).

One outcome could see the firm eventually agreeing to pay Apple a license fee for each Android-based smart phone and tablet sold, although it wasn’t clear whether the judgment would be enforced worldwide or only on U.S. shipments.

Royalties could be as much as $5 per device, which if applied worldwide, would be more or less in line with what Samsung is currently believed to be paying to Microsoft Corp.
MSFT, -1.96%
to license its technology, according Bernstein Research senior analyst Mark Newman in Hong Kong.

Analysts at Nomura said in a note Monday that any royalties paid to Apple
AAPL, -1.53%
would likely only apply to U.S. shipments, which account for a forecasted 30 million units or about 15% of Samsung smart phones shipped worldwide in 2012.

As a result, Nomura said, Samsung could be required to make $600 million in annual payments to Apple, assuming licence payments of $20 per device.

Nomura said that the royalties were unlikely to apply to jurisdictions where courts have already rejected Apple’s patent-infringement claims against Samsung, such as South Korea and the U.K.

However, the financial impact would be relatively small, Nomura said, saying the annual royalties would amount to about 3% of Samsung’s annual operating profits from smartphones.

“We view this litigation as more about each party’s self esteem, rather than a money issue,” the Nomura analysts said.

“While it seems negative to Samsung on a first look, the penalty has come out less than half of possible worst scenarios,” they said.

Similarly, Bernstein Research also saw the impact as negligible, saying even one of darkest scenarios for Samsung amounts to a 3.8% decline in 2013 earnings per share.

Bernstein Research’s Newman said the real impact would be to the company’s brand image among consumers, rather than its bottom line.

“This result has proved to be an embarrassment and could be a slight dent on public opinion which is hard to quantify,” Newman said in a weekend note.

Other unknowns include the fallout on “the entire Android ecosystem,” according to Newman, who said Friday’s U.S. verdict could prove a huge shot in the arm for Apple in taking on Samsung, currently the world’s No. 1 smartphone maker by shipments.

Buy Samsung?

In a note Monday, Citigroup analysts shrugged off the lasting impact of last week’s court decisions, and urged investors to view any sell-off in Samsung shares as an opportunity.

“We recommend accumulating on the dips, as Samsung will continue to sustain high-end smartphone leadership with the synergy with in-house leading-edge components,” Citigroup analysts said.

Much of the negative outcome from Apple’s court win had already been priced into the Samsung shares, with the market capitalization shrinking around $10 billion in the two-week lead-up to Friday’s judgement, Citigroup said.

However, it also cautioned of risks to Samsung’s profit in the third quarter, noting the outlook could be affected if the technology giant is hunkering down for a long legal battle, while rising competition in its core electronics business was another worry.

Meanwhile, Bernstein Research’s Newman said that Samsung and other Android phone makers would likely find ways to mitigate the impact of Friday’s court ruling in product development.

Changes in product design and software could be forthcoming, according to Newman, who praised Samsung’s approach in the development of its Galaxy S3 as helping “to avoid infringing these patents.”

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